By Ross Colvin

WASHINGTON (Reuters) - President Barack Obama said on Wednesday the U.S. government was paying too much for things it did not need and ordered a crackdown on spending "plagued by massive cost overruns and outright fraud."

The Democrat, under fire from Republicans for the $3.5 trillion price tag for his 2010 budget plan, also took aim at predecessor George W. Bush and noted the cost of government contracts had doubled to more than half a trillion dollars over the past eight years.

Obama, who inherited a $1.3 trillion budget deficit when he took office on January 20, said wasteful spending was a problem across the government, but he zeroed in on the defense industry and costly weapons projects hit by "delay after delay."

"The days of giving defense contractors a blank check are over," Obama told reporters in a briefing on his reforms.

He has singled out the ballooning costs of a Lockheed Martin Corp project to build a new presidential helicopter fleet as an example of the procurement process "gone amok."

Defense companies, however, bristled at Obama's suggestion they had been running wild with taxpayers' money and insisted there had always been oversight and accountability.

Obama said he was ordering a reform of the way the government did business, a move he said would save taxpayers $40 billion a year and help cut the budget deficit, which he has forecast will hit $1.75 trillion for the 2009 fiscal year.

"We will stop outsourcing services that should be performed by the government and open up the contracting process to small business. We will end unnecessary no-bid and cost-plus contracts," he said.